Prof Parsons speaks at the SA-German Chamber of Commerce and Industry
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Today Prof Raymond Parsons is speaking at the SA-German Chamber of Commerce and Industry on the topic:

RECESSION, RECOVERY AND REFORM IN THE SA ECONOMY

Prof Raymond Parsons

‘In the fast-growing economies, policymakers understood that successful development entails a decade-long commitment, and a fundamental bargain between the present and the future. Even at very high growth rates of 7%-10% it takes decades for a country to make the leap from low to relative high incomes….this bargain will only be accepted if the country’s policymakers communicate a credible vision of the future and a strategy for getting there. They must be trusted as stewards of the economy and their promises of the future must be believed’- The Growth Report, May 2008

1.INTRODUCTION

May I begin by thanking you for the opportunity of addressing the Chamber today and sharing some thoughts with you on the interlinked subjects of recession, recovery and reform in the SA economy. As businesspeople interested in SA’s economic outlook it remains essential that you track and monitor the trends in the economy which influence your strategic business decisions in this country. You are an important foreign business constituency within the broader business community, and you have a significant stake in key sectors of this country’s economy.

About 600 German enterprises have started operations in SA and employ nearly 100,000 workers. You will therefore be aware of the extent to which the SA economy has been increasingly under the spotlight in recent months, against the background of both short and long term factors of significance to SA’s economic performance. Regular, even daily, assessments of economic trends in SA are available and what is important here today is to stand back and try to form a balanced perspective about the welter of data that are currently available on the economic and business outlook.

These trends are also unfolding in a year in which more broadly the convergence of the 20th anniversary of democracy in SA, the 2014 elections and the actioning of the National Development Plan (NDP) underscore the need for key decisions to be taken and implemented to change SA for the better. A combination of political circumstances and economic exigency make reforms of one kind or another inevitable. Economic recovery and reform must now be dealt with in tandem, which together with recent talk of ‘recession’ in SA, are now compressed into a single equation, as we prepare to unpack the ‘big picture’.

2. UNPACKING A 2014 ‘RECESSION’/GROWTH PROSPECTS FOR SA

To begin with, has SA recently experienced a recession? May I remind you that the dreaded word ‘recession’ is technically defined as two successive quarters of negative growth. At one stage a few weeks ago the question of whether a ‘technical recession’ would develop in SA was a very close call, after a signicant shrinkage in growth in the first quarter of 2014 had then raised the spectre of a possible limited recession. Many analysts nonetheless hoped that a better second quarter economic performance would offset the economic damage resulting from the prolonged platinum sector strike, which has indeed since ended.

The bad news is that unfortunately some preliminary statistics for the second quarter of 2014 show the scales again tipping towards confirmation of a ‘technical recession’ in the first half of 2014, although until we eventually get more definite figures it still appears a ‘touch and go’ economic experience. The most recent SARB statement of 17July also suggests that the hopes of a better first six months of 2014 were not realized. The good news is that, if the growth statistics later confirm that we have indeed gone through a ‘recession’ in the past few months, by that time we will hopefully be on our way out of it!

These warning signals have nonetheless been steadily translated into recently revised forecasts downward for overall economic growth in 2014, such as:

IMF: 2.3% to 1.7%

SA Reserve Bank: 2.1% to 1.7%

Fitch: 2.8% to 1.7%

World Bank: 2.7% to 2.0%

Investec: 2.2% to 1.9%

Finance Minister Nene is expected to lower the Treasury’s growth forecast in the ‘mini-Budget’ in October and he is reported to have said recently that growth in 2014 may only reach 2%, compared with the original Budget forecast of 2.7% earlier this year. This is a realistic putative economic reassessment but probably will need to be reviewed again later. Although the SA economy will bounce back to some extent in the second half of this year in response to any earlier ‘technical recession’ as lost ground is made up, it is now unlikely to reach 2% growth for 2014 as a whole, given the economic factors that currently carry weight.

Presently I am slightly more pessimistic about this year’s growth rate than some other analysts, expecting only about 1.5% growth, but I would be happy to be proved wrong on the upside! Of course, it is the order of magnitude in these forecasts that matter, rather than the illusion of false precision that we must seek. The latest growth figure predictions for 2014 have nonetheless tended to cluster in the same lower range. We also need to factor in the impact of the recent NUMSA/SEIFSA one-month strike. Although the strike ended this week, the cumulative quantifiable cost to the economy could be roughly about 0.3% of GDP in the 3Q 2014, and as with the platinum belt strike, there will also be socio-economic after-effects.

As Minister Nene emphasised to Parliament on July 21 there are obvious implications for tax revenues and fiscal policy in these sluggish growth trends. Difficult decisions lie ahead and policy options have narrowed. He rightly added that the biggest constraints to economic growth in SA were domestic and these were ‘within the powers of South Africans to fix’. What does this imply? What does SA need to do to correct or redress the situation? It means that SA should be prepared to look beyond the immediate bad news – low growth, cost inflation, bad strikes, high deficits and weak confidence – and see what can be done to improve the longer term outlook.

3. HOW MUCH ROOM IS THERE TO MANOEUVRE?

We need to briefly recapitulate what has been SA’s economic experience has been so far: what is the perspective?

apart from a few short windfall episodes, SA has over the years remained up until recently a modest 3.0% to 3.5% growth performer. It has not yet discovered within itself the magic to transform towards 5% or higher average growth performances, as some other competing emerging economies have done. SA needs about 3.5% average growth just to show a modest net gain in employment

after a short, speculatively-driven consumption boom during 2005-2007 and a short sharp recession in 2009, we now find ourselves constrained in an average 2%-3% growth trajectory, with a significant loss of growth drivers and focused purpose, reinforced by prolonged key strikes and labour unrest. All this has had a negative impact on investor confidence and the exchange rate

having rightly pursued counter-cyclical fiscal policies since 2009, fiscal ‘space’ has now shrunk, which combined with a long-standing small tax base and recent multiple credit-rating downgrades, limits fiscal flexibility. The good news has nonetheless been the National Treasury’s recent success in issuing long term bonds on favourable terms, but which does not fundamentally change the fiscal outlook

cost inflation having pushed inflation to the upper end of the inflation target range of 3%-6%, the SARB is impaled on the horns of a policy dilemma. It has to contemplate steadily raising interest rates (however gradually) on a weak economy in order to meet its anti-inflation mandate. The interest rate cycle is out of kilter with the growth cycle and the growth rate is far below the inflation rate. A growth rate this year of approximately 1.5% combined with an inflation rate of about 6% is not a good bargain for any economy!

All this suggests that there is little room to manoeuvre in terms of the usual methods of stimulation through orthodox monetary and fiscal policies. The flexible exchange rate remains a useful shock absorber and, together with the presence of global players on the JSE, helps to explain the apparent dichotomy between a weak domestic economy and a strongly performing JSE. But a protracted weak currency also has its downside and does not offer a long term solution. The emphasis therefore now needs to be on urgently addressing the structural and regulatory issues which prevent SA from unlocking its true economic potential and achieving much higher job-rich growth.

While slow global growth will weigh on SA, labour instability and energy supply constraints are indeed the main factors preventing SA from meeting its development targets. It is also precisely when monetary and fiscal policies might tighten that the emphasis must shift to tackling structural and regulatory issues to create an environment for more profitable investment and productivity improvements. Happily, the existence of the NDP offers an integrated framework for structural solutions, provided they are sensibly and cohesively implemented. Action plans are now beginning to take shape and service delivery platforms are enjoying more focus.This is where economic recovery and reform must converge to build confidence about the future with the assistance of NDP action plans.

4. ENTER THE NDP AND ITS IMPLEMENTATION

So where are we with the NDP in addressing SA’s overarching challenges of unemployment, poverty and inequality? The first year of President Zuma’s second term is the toughest yet, because it is now that the implementation of the NDP must be getting into its stride, two years after it was officially accepted in 2012. Endless consultation is no substitute for effectual decision-making. There is a trade-off between interminable debate and effective implementation. Frustration and delay occur when these processes become part of the problem, instead of the solution. We must now indeed move on to the next phase.

The acid test for the NDP from now on is therefore one of implementation, especially for a country with unfortunately a strong track record in procrastination. Efforts to craft sensible implementation policies for SA have long felt like pushing a huge boulder up a hill. SA seems to care more about making plans, policies and laws than making them work. That needs now to change. We forget how many times previous well-intentioned socio-economic programmes in SA have been casualties of delay, weak implementation or ideological resistance.The lesson to be learned from previous initiatives is the importance of focusing on capacity-building and implementation.

Even if the latest NDP and its action plans are not perfect in all respects we must move ahead and adapt as we go along. We need to become a nation of pragmatists, even at the cost of some disturbance to a few cherished ideological shibboleths. We need to take the longer view. A prominent Chinese leader once explained the Chinese economic ‘miracle’ by saying: ‘Does it matter whether the cat is grey or brown, as long as it catches the mice?’. In the meantime the Government has said that the implementation of the NDP ‘trumps all other plans’ and polices will steadily be aligned with it.

This policy alignment should be the mantra for decision-making and of interest to business. If SA wants a policy environment which provides more certainty and predictability, and thus boosts both domestic and foreign investor confidence, this is the way to go. Minister Jeff Radebe in the Presidency is now charged with undertaking ‘socio-economic assessments’ of existing and new legislation to see whether they are ‘NDP compliant’. The opportunity to engage with Minister Radebe to ensure this compliance must be taken up. From the perspective of the business community, including foreign investors, the test of the extent to which the legislative and policy framework is sufficiently ‘investor-friendly’ is now of serious concern.

The SONA last month by President Zuma to Parliament outlined how the government wants to set about addressing issues such as improving the economic outlook, ensuring energy security and strengthening local government delivery. And last week the Cabinet approved the medium-term strategic framework that will be the first five-year block of the 2030 vision of the NDP. The framework apparently contains NDP implementation plans with detailed targets, indicators, roles, responsibilities and time frames. A valuable additional and relevant target would be for SA to aim to create, say, one million new enterprises over time to generate the extra 11 million jobs wanted by 2030.

For unless policy can reinvent itself within the NDP as a reform process which strongly encourages private enterprise, growth and employment will be stunted.The private sector must now in turn also step up to the plate and identify those aspects of the NDP through which it can maximize the essential role assigned to it by the plan. It must ensure that it is ‘crowded in’ and not ‘crowded out’ in the process of implementing the NDP. We need to harness the business sector on a much bigger scale where it can make a difference, such as in the delivery of infrastructure and other services. There are many potential opportunities for the private sector in the NDP, but traction needs to be developed.

5. SOME PRELIMINARY CONCERNS ABOUT NDP IMPLEMENTATION

There are some preliminary concerns about the implementation of the NDP thus far. So much depends on whether enough of the NDP is implemented in full, without too many ‘ifs and buts’ which would neuter its impact, and on when the changes will take effect.

In the first place there are just too many red lights flashing in the economy at present for all key stakeholders not to urgently join hands in broad support of the NDP and to act in its spirit wherever possible, even in the absence of complete consensus, There needs to be more visible cooperation and reinforcement, and less ‘nit-picking’ of the plan. By now we have had a liberal overdose of economic diagnosis and dissection and fatigue has set in. Of course, the NDP and its action plans have several pitfalls, but on the whole they are superior to their many predecessors. We clearly also need to use the time given by the credit-rating agencies wisely to do what has to be done within the NDP framework. Time is not on our side.

Then, despite the government’s renewal of interest in infrastructural development, with 18 strategic infrastructural projects, implementation remains slow. The right Infrastructural investment is a key growth and employment driver. Most of the strategic integrated projects have yet to take shape in terms of scope and funding. Bureaucratic red tape and the small skills base are hampering growth in the engineering industry. Yet industry professionals say that government needs to announce big infrastructural projects to ignite skills training in the building and construction sectors.

The government has created what it calls ‘Operation Phakisa’ (based on Malaysia’s Big Fast Results methodology) to fast track certain aspects of the implementation of the NDP. ‘Phakisa’ means ‘hurry’. It is an encouraging development and strikes the right note. However, the first commitment under this implementation process is the Department of Environmental Affairs focusing on unlocking the economic potential of SA’s oceans, and the second project is to make health clinics more efficient. SA needs to be seen to visibly promoting much more than those two projects on the basis of implementable policies and affordable projects.

The concept of ‘Operation Phakisa’ needs to permeate more widely. Unless priorities such as infrastructure, State capacity, labour market reform and the costs of doing business in SA are visibly placed at the top of the implementation agenda, growth and employment will languish. Hence the first five year ‘block’of the NDP implementation strategy accepted by the Cabinet needs to be critically interrogated. In a National Treasury study done last year, which prioritized the structural reforms that SA needs, the emphasis fell on cutting transport and communication costs, jacking up skills and productivity, and raising domestic and foreign investment, much of which will also help to make SA more globally competitive.

Also, as we move towards implementation of the NDP the question of affordability of what is being decided comes increasingly to the fore. ‘Big ticket items’ like land reform, nuclear power and a national health scheme are already projecting large financing requirements which will place a significant strain on public finances. Looming fiscal shortfalls can appear a distant concern in the face of high unemployment and sluggish growth but cannot be ignored given existing commitments regarding debt reduction. It will be necessary to show how heavy expenditure plans will be reconciled with fiscal constraints in the next Medium Term Budget Policy Statement (MTBPS ) in October. The NDP is ‘no free lunch’.

Additionally, there is the question of the efficacy of the civil service. It is imperative to ensure a delivery-driven public service providing the capacity and support required to implement the NDP at different levels of government. A stable bureaucracy is necessary to provide the state with the ability to execute policy decisions, especially at a time of rising expectations. The NDP itself draws attention to excessive political interference in the appointment of senior bureaucrats. This has led to unnecessary turbulence in senior posts, which has undermined the morale of public servants and weakened citizens’ confidence in the state. Effective capacity is crucial to the creation of a ‘delivery state’.

The NDP offers the opportunity promote greater coherence and coordination in policy at a time when it is sorely needed. The Cabinet will need to constantly demonstrate its commitment as a team to the broad direction of the NDP, as any serious lapses in policy will create worrying credibility problems. If only lip-service is paid to the NDP and some other agenda is pursued under its umbrella, this will not only damage investor confidence but also vindicate the sceptics. SA too often carries out a range of mini-reforms that prompt anxiety and conflict rather than resolving underlying problems.

There is no magic in the words ‘National Development Plan’ as such: it is not a latch key that will unlock the door to Utopia. It visualizes instead a SA embarking on a tough new economic phase towards 2030, on which everything depends on the efficacy of implementation, participation and accountability. The NDP and its outcomes need progressively to build credibility. It would be valuable for the President to table an annual report on the NDP to Parliament, as this would encourage discussion, feedback and help to generate support. Perhaps there should be an ad hoc standing Parliamentary Committee to deal with the NDP.

6. SUMMARY AND CONCLUSION

Even allowing for the residual global economic headwinds since 2008, it is apparent that domestic economic, social and political factors are the major forces that have driven the setbacks SA is now experiencing. With the world economy slowly recovering, the focus must now fall on elements over which SA does have control, such as its domestic policies. We are too prone to shy at every unfavourable puff of smoke that blows in from the world economy and to over-use them in analysis as a smokescreen for not facing up to the internal remedies available to make SA less vulnerable.

We must build on our strengths and address our weaknesses. Fortunately, SA has a plan at hand, which happens to be the NDP, and which offers a framework and a sense of direction to 2030. Within it solutions must now be implemented to address the structural and regulatory challenges in the economy, and also make the SA economy more globally competitive. (Germany having proudly won the 2014 Soccer World Cup, German businesspeople will appreciate that, as in international sport, neither in international trade and investment does anyone give a game away!)

For SA the successful economic management of recession, recovery and reform must be seen as an inclusive process. Instead of the vague rhetoric of a ‘developmental state’, we should rather be promoting a ‘delivery state’, to put the emphasis where it belongs. A week may be a long time in politics but five years is unbelievably short for delivery. The conventional political wisdom is that, when ‘right’ but often unpopular reform measures have to be taken, it is better to do so early in the electoral cycle. If SA is realistically to have an economy which is bigger, stronger and better by 2030, effective implementation of key NDP priorities must be begin to be visible in the next two or three years.

Ultimately the quality of leadership at every level remains decisive to move things forward. Leadership here is all about smart change management. In this process, a better relationship between government and business becomes essential to close the gap between what the government wants, on the one hand, and what business needs, on the other, to make a success of the NDP. The private sector remains indispensable to getting positive outcomes and it is the yeast in the bread to be baked.

In conclusion, therefore, while it may be too early to predict that the NDP will generally succeed, it is clearly also much too early to say it will definitely fail. It lies largely in SA’s hands to write its own story from now on, and it is an opportunity which will not come again soon.
Thank you!